Sprott/Central Goldtrust

Overview

The Offeror is making the "Offer" to purchase all of the issued and outstanding GTU Units (other than those held directly or indirectly by the Offeror). The Offer comprises an exchange offer alternative (the ''Exchange Offer Election'') and a merger alternative (the ''Merger Election''). Holders of GTU Units (''GTU Unitholders'') that elect the Merger Election can exchange their GTU Units for PHYS Units based on the "NAV to NAV Exchange Ratio" (currently estimated to be approximately 4.4464 PHYS Units for each GTU Unit) on a tax-deferred basis for U.S. and Canadian income tax purposes. GTU Unitholders who wish to crystallize the realization of any gain (or loss) for Canadian income tax purposes may elect the Exchange Offer Election. The Offer is conditional on the number of GTU Units in respect of which an Exchange Offer Election or Merger Election is made, together with those GTU Units held by the Offeror at the Offer Expiry Time, representing at least 66 2/3% of the total outstanding GTU Units. On completion of the Merger, former GTU Unitholders would hold 36% of the outstanding PHYS Units.

Offeror

Sprott Asset Management Gold Bid LP, an Ontario limited partnership that is owned and controlled by Sprott Asset Management LP, the manager of Sprott Physical Gold Trust.

GTU

A mutual fund trust trading on the TSX and NYSE MKT and holding mostly gold bullion and with approximately 19.3M GTU Units outstanding. The GTU Units do not have the physical redemption feature of PHYS Units.

GTU Trustees' response

Their 19 June 2015 letter to unitholders (recommending rejection) stated:

The Sprott Offer does not provide any meaningful premium, but asks Unitholders to exchange their Units for units of Sprott PHYS, which involve higher costs, increased tax risks, and reduced governance rights. … Sprott PHYS' physical redemption feature is substantially the same as the one that Polar Securities proposed that GoldTrust adopt – a proposal that was overwhelmingly rejected by over 80% of votes cast (excluding Polar) at GoldTrust's Annual and Special Meeting of Unitholders held just last month. … Sprott PHYS' redemption feature would expose certain non-redeeming U.S. Unitholders to potentially increased ongoing future tax liabilities if Sprott PHYS delivers gold to satisfy a physical redemption request from a unitholder and the price of gold exceeds Sprott PHYS' undisclosed Canadian dollar cost base for its gold holdings. As a result, if any Unitholder elects to redeem when gold prices exceed the Canadian dollar cost base of Sprott PHYS' gold bullion, certain non-redeeming U.S. Unitholders could incur tax liabilities even though they took no action themselves.

Sprott Physical Gold Trust

A s. 108(2)(a) mutual fund trust trading on the TSX and NYSE Arca and holding mostly gold bullion. 152M PHYS Units are outstanding. PHYS Units may be redeemed at the option of a PHYS Unitholder for physical gold bullion in any month, but only for amounts that are at least equivalent in value to one London Good Delivery bar or an integral multiple thereof, plus applicable expenses. PHYS Units also may be redeemed at the option of a PHYS Unitholder for cash on a monthly basis at a redemption price equal to 95% of the lesser of: (i) the VWAP on NYSE Arca for the last five trading days for the month in which the redemption request is processed; and (ii) the NAV of the redeemed PHYS Units for the last day of the month in which the redemption request is processed. Prior to the public announcement of the Offer, the GTU Units were trading at a 7.6% discount to NAV.

Merger

Pursuant to the Merger Agreement, Sprott Physical Gold Trust would agree to acquire substantially all of the assets and assume all of the liabilities of GTU in return for such number of PHYS Units as is determined by the NAV to NAV Exchange Ratio based on the then outstanding GTU Units. GTU would agree to then redeem all outstanding GTU Units and distribute the PHYS Units to the former holders of GTU Units on the basis of the NAV to NAV Exchange Ratio. Any PHYS Units received by the Offeror as a holder of GTU Units at such time would be transferred to Sprott Physical Gold Trust and be cancelled. However, the Offeror may retain one GTU Unit to keep GTU in existence.

Advance Merger approval

The execution of a Letter of Transmittal (or, in the case of GTU Units deposited by book-entry transfer, the making of a book-entry transfer) appoints the Offeror as the depositing GTU Unitholder's nominee, proxy and attorney in respect of matters related to the Offer, the Merger Transaction, the nomination, election or removal of GTU Trustees, and amendments to the GTU Declaration of Trust. The Offer intends use the Power of Attorney granted in the Letter of Transmittal to pass special resolutions to approve the merger transaction and related trust deed amendments pursuant to a written resolution. Subject to the approval of the special resolutions, the Offeror intends to sign and deliver, on behalf of GTU, the Merger Agreement with Sprott Physical Gold Trust prior to the Expiry Time for the Offer.

Canadian tax consequences

Exchange Offer Election. An exchange pursuant to an Exchange Offer Election will occur on a non-rollover basis.

Merger

The Merger will constitute a ''qualifying exchange'' as per ITA s. 132.2 of the Tax Act, thereby allowing substantially all of the assets and liabilities of GTU to be transferred to Sprott Physical Gold Trust for proceeds of disposition equal to the tax cost of such assets. In such circumstances, there should be no taxable income to GTU arising from the transfer and, as a result there should be no tax liability to GTU Unitholders resulting from the transfer.

Merger Election

Where a Merger Electing GTU Unitholder or a Non-Depositing GTU Unitholder disposes of GTU Units to GTU in exchange for PHYS Units on the redemption of GTU Units pursuant to the Merger, the GTU Unitholder's proceeds of disposition for the GTU Units disposed of, and the cost to the GTU Unitholder of the PHYS Units received in exchange therefor, will be deemed to be equal to the adjusted cost base to the GTU Unitholder of the GTU Units immediately prior to their disposition.

U.S. tax consequences

Exchange. An exchange of GTU Units for PHYS Units pursuant to the Exchange Offer Election or the Merger Transaction should be treated as a single transaction for U.S. federal income tax purposes that is intended to qualify as a ''reorganization'' under Section 368(a) of the Code (a ''Reorganization''). If the Offer and the Merger Transaction were treated as a Reorganization then, subject to the PFIC) rules, a U.S. Holder that exchanged GTU Units for PHYS Units pursuant to the Exchange Offer Election or the Merger Transaction generally would not recognize gain or loss on the exchange.

PFIC rules

. Proposed U.S. Treasury regulations under s. 1291(f) provide that gain would not be recognized on a disposition of stock in a PFIC for which no election has been made, if the disposition results from a non-recognition transfer in which the stock of the PFIC is exchanged solely for stock of another corporation that qualifies as a PFIC for its taxable year that includes the day after the non-recognition transfer. Sprott Physical Gold Trust expects to be classified as a PFIC for its current taxable year. Accordingly, if the proposed U.S. Treasury regulations were finalized and made applicable to the Offer and the Merger Transaction (even if this occurs after the Expiry Date), the exchange of GTU Units for PHYS Units pursuant to the Exchange Offer Election or the Merger Transaction likely would not be treated as a taxable transaction pursuant to s. 1291(f).